Monday, November 13, 2006

Calls of Note Part 3

Two tier-1 firms are commenting on Hewlett-Packard (NYSE:HPQ) this morning:

- Deutsche Banks notes they have adjusted their price target up to $40, from prior $34,
reflecting increased visibility of near-term results and expectation of a possible $0.02-$0.03 of EPS upside this quarter. Firm's revenue and EPS estimates remain unchanged.$40 price target assumes HPQ trades at 16x CY07 EPS estimate which is within HP's historical range (10x-18x since the acquisition of Compaq). The valuation is also underpinned by a 10-year DCF (WACC 9.2%, growth of 3%). At current levels they view shares of HPQ as fairly valued. Firm believes the market is discounting future EPS of ~$3.00 in CY08 and ~10% operating margins. As such they believe there is limited upside and rate HPQ's shares a Hold.

- Merrill Lynch notes that for quite some time their research has argued HP's long run earnings power should exceed $3.00. Today they increase this estimate to $3.50+. To get there, the firm analyzes $2.5bn of net realizable margin enhancement plus the effects of incremental revenue growth and buybacks.

Specifically, beyond their F2006 estimate of $2.20, the firm anticipates an incremental
$0.20 from anniversary effects of the original restructuring, $0.35 from IT consolidation; $0.20 from real estate consolidation, $0.28 from upsell and attach in PCs and industry standard servers; $0.22 from indirect procurement optimization; $0.14 from direct procurement. They then subtract $0.21 from overlap in the above categories and subtract $0.47 for margin lost to price and re-investment. From there they add $0.11 annually in earnings from incremental revenue growth ($0.34 over 3 years); and $0.14 annually in share repurchases ($0.41 over 3 years). The sum of these supports ML's $3.50+ long run earnings power estimate. Tgt goes to $46 from $42 with the analyst noting that in 18-24 months they think the stock will discount long run (~F2009) number of $3.50+ and trade around $54, a 16% compound return over the next two years.

Notablecalls: The stock is back right where UBS made their positive comments regarding their $3.00 EPS power on Oct 23. The comments from DB and ML come ahead of results scheduled for Nov 16. I wish some knucklehead analyst came out and upgraded the stock, providing traders with an almost perfect short-selling oppy. I suspect today's comments won't gap the stock high enough. But lets face it, no analyst wants to upgrade HPQ ahead of results given the streched valuation and looming corporate spending deceleration.

1 comment: said...

World's Largest Thanksgiving Dinner to Thank our Troops and Veterans at Thanksgiving.

I am involved in a really great program to thank our troops and all veterans of World War II, Korea, Vietnam, Desert Storm, and the War on Terror. Together, we can send them an awesome expression of support this Thanksgiving. Brian Littrell of The Backstreet Boys is the spokesperson.

All you have to do is register your Thanksgiving Dinner at to be included in the World's Largest Thanksgiving Dinner. On Thanksgiving Day, we will thank all our troops and veterans for protecting us and for protecting our freedom.

We want the young people of America to know that Freedom is not Free, so please register today. There is no charge to register and JUST BY REGISTERING, you will be showing your support of the troops and our veterans. When you register, if you want you can get your own web page to send to friends and family. For more information, go to

There are 24 million veterans in America. Our goal is one million families thanking our troops and veterans this Thanksgiving! You are One in a Million, so please sign up today at

We are losing 1,800 World War II veterans everyday, so let’s all say thanks before it is too late. So, pass this on to anyone and everyone who knows a veteran or one of our troops, or just wants to say thanks. To help reach our goal, put this on as many blog sites as possible, we want everyone in America to have the opportunity to thank and honor our men and women in uniform.

They stand watch for us; here is our chance to say thanks! Please don’t put it off, do it now—thanks!